Ric Edelman, founder of Edelman Financial Services, and one of the driving forces behind the creation of the $1.35 billion iShares Exponential Technologies ETF (XT), has had an interest in technology as well as its implications for advisors and investors. His most recent book, "The Truth About Your Future," is all about how rapid technological advances will radically change how we live, invest and retire. ETF.com chatted with him about how fintech is helping bring to fruition the future he anticipates.
ETF.com: What do you consider to be a working definition of “fintech”?
Edelman: Fintech is the use of technology for the creation or delivery of financial products or services.
ETF.com: Do you see it mainly as something that advisors use? Or something that’s really affecting the lives of both retail investors and advisors?
Edelman: Financial technology is created by technology companies and financial service companies for the purpose of creating investment opportunities or for service delivery. And the products they create are used by consumers or advisors.
On the advisory side, the products or services are either for advisors to help them practice more efficiently or at lower cost, or they’re designed for the advisors to provide to their clients to improve the services they’re delivering to clients.
Fintech has a presence throughout the world. Your Visa card is an example of financial technology. The fact that you're able to make a purchase without having to have cash in your pocket is a result of technology. So financial technology has been around for decades, hundreds of years.
You could argue that currency itself is a technological innovation. Ever since we stopped the practices of trading food for fur, you could argue that we’ve been involved in financial technology.
More recently, we’re seeing amazing innovations at the consumer level, such as PayPal or Apple Pay, where you don’t even need your Visa card with you, you just use your smartphone to make a transaction. We’re seeing online banking, which is very commonplace now. A great many Americans never visit their bank to make deposits. They just take a photograph of their check and email it to their bank to make a deposit.
Many millennials don’t even have credit cards, they instead have a Venmo account. They transfer money between friends, or parents use Venmo to send money to their college-aged students instead of sending them checks. They just transfer money via a text in seconds for free. We’re seeing financial technology pervasive in the economy, not merely at the advisor level.
ETF.com: How is this changing how advisors do their jobs, though?
Edelman: Advisors have to become technologically proficient. Consumers are demanding technological solutions; for example, being able to talk with your client by video chat, or being able to aggregate your accounts.
Clients tend to have investment accounts at a wide variety of institutions, with their employers’ plan, with their bank. They might have a variety of brokerage accounts or IRA accounts at different institutions and mutual fund companies. And historically, that meant you’d get different statements from every institution, or you had to go to every different website to look at your assets.
Today there are account aggregators available. We provide one to our clients. They can list all of their assets, no matter what institution they're at, not just the assets we manage for them. And they can go to our website at Edelman Online, and they can see every account they have, no matter where it is, in one convenient location. This is a great convenience for the consumer.
It’s also of tremendous value to the consumer, because it allows their advisor to look at everything they have, so that the advice we give the client is more comprehensive and more coordinated, so that we see everything the client owns without having to rely on the client remembering to tell us, or the client failing to give us accurate or timely data.
We’re able to look at it along with the client to give them advice for accounts that they don’t maintain with us, such as a bank CD that might be maturing, or the interest rate on a bond that isn't as good as what's available elsewhere.
ETF.com: What do you see as the most innovative or useful fintech developments over the last three or four years? Because it’s been moving fast.
Edelman: It is. The technological development is occurring at an exponential rate, which is the basis of my book, “The Truth About Your Future.” And there are two primary innovations under development that are going to radically alter financial planning and the typical advisor’s practice.
The first is health sciences. Medical innovation is advancing at an exponential rate. And by 2030, many technologists anticipate the vast majority of disease will be cured. And life expectancy will be dramatically increased. Aging itself, they have discovered, is a disease. And it too will be cured, along with heart disease, respiratory illness, obesity, cancer, diabetes.
These will all go away, which means that financial planners who are telling their clients that they’ll retire at 65 and die at 95 are giving advice that is severely outdated and fatally flawed.
So the financial planning models have to be updated to reflect the likelihood that a client will live to 110 or 120 and will maintain earned income—will continue to work into their 90s and 100s. It’s a completely changed paradigm from what planners have historically told their client.
The second, specifically in the fintech world, is the blockchain. Many technologists tell me the blockchain is the most important innovation in human history. They equate it in terms of importance to fire, the wheel and the internet.
The typical financial advisor has either never heard of the blockchain or is unable to describe it, meaning that advisors today are as clueless as their clients. And that’s not a healthy situation for the client. The blockchain is the underlying technology that was used to develop bitcoin, the world’s first digital currency.
Today there are more than 800 digital currencies. Bitcoin and the blockchain have gone from a sideshow of little credibility to now mainstream evaluation, where every leading bank and insurance company and government on the planet are engaged in extensive research and development, recognizing that blockchain has the potential to completely transform the global financial system.
ETF.com: Will fintech replace advisors?
Edelman: It’ll replace many of the functions advisors currently provide. As recently as the 1980s, people—to find out what their stock was worth—called their broker. Or they went to Paine Webber, and they sat in the lobby and watched the ticker go across.
The only way to find out the value of a stock was to literally call your broker on the phone. Well today it’s on your smartphone for free, instantaneously in real time. So the broker who used to devote his career to phone conversations with his clients about the value of their account, brokers don’t do that anymore. Clients now have full access to that online.
The blockchain similarly will eliminate many of the administrative services and functions that advisors have traditionally provided. The client won't need the advisor to tell them what the value of their account is or to facilitate the rebalance of their portfolio.
What the client will need the advisor for is the strategic analysis and advice that the technology isn't designed to provide. Blockchain is simply a transaction protocol; it isn't an advisory one. So advisors will find their jobs changing, that the services they provide will become different. They will, in many cases, become more valuable to their clients, rather than less valuable, provided that they are, in fact, capable of providing advice. If all they do is trade for the client, they’ll become obsolete, because the client will be able to do that without them, just as they can now.
ETF.com: It strikes me as interesting that the increase of automation also seems to be leading to increasing the demand for customization in other areas.
Edelman: Yes. That, again, goes back to the importance of advice, because currently, if you go to a mutual fund, you're going to own the identical portfolio of every other investor of that mutual fund.
If you go to a typical advisor, the portfolio you get will be the same portfolio all of the other clients are getting, a mix of mutual funds. But the client of the future will have a portfolio that’s truly unique—a portfolio that’s custom created just for them by their advisor, with the support of technology for analysis and data and such.
But the fundamental work of analyzing what that portfolio should look like, and explaining it to the client, and being able to answer the client’s questions, will be the core work of the advisor of the future.